Sometimes, when a person finds himself behind on several debts or in imminent danger of defaulting, he will negotiate with his creditors to pay only some of the total money that the borrower originally agreed to pay. Settling for less than the person originally owed is known as debt relief or debt settlement. Although debt relief can provide a person some financial breathing room, it can have long-term repercussions.
Debt Settlement
Many companies are willing to accept only partial payment by a debtor on an outstanding debt. This is because the companies believe that it is better to receive some payment on a debt than to have an uncollected sum remain on their books with the possibility that none will be paid. This may help the debtor in the short-term, but settling a debt hurts a person's credit rating.
Short-Term Effects
The main effect of debt settlement is that a person will be allowed to reduce their total debt load. In some cases, a person's debt may be wiped out entirely. However, whenever a person agrees to pay only a portion of the debt that he originally agreed to pay and this decision is reported to a credit reporting bureau, the person can expect his score to drop.
Long-Term Effects
A drop in a person's score can make a person ineligible to take out lower interest loans. If the person needs to borrow money again, this can put him deeper into debt. However, a person may be able to rebuild his credit rating after getting out of debt, so debt settlement can, in some cases, help a person regain a financial foothold in the long-term.
Considerations
Due to the damage it does to a person's credit rating, debt settlement is often considered a near last resort (with bankruptcy being the true last resort). However, in some cases, a company will not report the debt settlement to a credit reporting agency or will report the debt as paid in full, often at the request of the debtor. This can make debt settlement less of a painful option.
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